Why it's time to rethink the start-up model

Entrepreneurs using technology for social good-while generating profits-are disrupting the status quo and bringing a more diverse face to the industry.

November 30, 2017

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JLL Staff Reporter

The dream of becoming an overnight billionaire has inspired many tech entrepreneurs to rapidly build their empires, but sometimes at the expense of sustainable growth and corporate culture.

It comes in response to the rapid rise of America’s tech industry over recent decades, where talent has generally been drawn from a small pool and concentrated in specific areas of the country. Start-up funding is disproportionately concentrated on the coasts, with the states of California, New York and Massachusetts receiving three-quarters of venture capital funding, compared to 23 percent for the “rest of America,” according to the Kauffman Foundation.

Meanwhile recent industry analysis from Recode found that women hold less than 30 percent of leadership positions at tech companies, with black and Latino representation even lower at between 4-10 percent.

“It’s time to flip the way we think about how start-up funding is allocated in the tech sector, and finding ways to support more women and people of color,” says Patricia Raicht, Senior Vice President and National Director of Research for the Western US JLL. She points to the broader benefits that come with diversity. “Diverse teams mean diverse thinking—and that can make for a more innovative work environment, which in turn drives company growth.”

While some inequity is simply symptomatic of a larger cultural phenomenon in the U.S., Mara Zepeda, co-founder and CEO, Switchboard, believes the lack of diversity in tech can also be traced back to the conventional “burn-and-churn” model of venture capital, which can stymy diversity in the earliest stages of a company.

“Traditionally, venture capitalists have sought out the tech founders who can deliver fast growth and major returns, exclusively,” says Zepeda. “They haven’t placed value on whether or not those founders—and their ideas—might also contribute to the greater good.”

Changing the face of tech

Diverse thinking may be just what the tech industry needs to fuel a movement to use technology to solve some of the world’s most vexing problems. “There’s tremendous interest right now in launching tech entrepreneurship in a more equitable and inclusive way,” says Zepeda, who is seeing some of this momentum first-hand as an organizer in the “Zebras Unite” movement.

The Zebra concept started when two female CEOs of socially conscious tech companies struggled to get funding from venture capitalists who only cared for the elusive billion-dollar-or-bust Unicorn. So they spearheaded the idea for creating ‘Zebras’, companies that drive profits and social good, often with an emphasis on including women and other underrepresented founders. The idea is gaining global traction from “zebra parties” in Berlin, to the DazzleCon conference in Portland, OR.

Diversity efforts abound outside the Zebra umbrella, too. In Oakland, California for example, the Kapor Center for Social Impact leverages capital, research and outreach to ensure an ever-growing number of tech startups by founders of color.

Geographical barriers are also being broken down, bringing funding to start-ups located far from the traditional tech heartland of Silicon Valley. In Chicago, Impact Engine offers mentorships and cash to entrepreneurs who see market opportunity in solving big social and environmental challenges. More than half of its portfolio companies are based in the middle of the country, addressing issues from economic empowerment and resource efficiency to health and education.

As more tech entrepreneurs flock to secondary markets in search of lower cost centers of innovation, investors are likely to find opportunities to help local economies flourish as they invest in businesses that do good. “A thriving tech sector is always good news for local communities,” says Craig Reinhart, Managing Director, JLL Portland. “The start-ups of today are tomorrow’s major employers and wealth creators.”

And when these start-ups come with a social conscious, they can ensure their values are embedded within growing markets. “When entrepreneurs embrace socially responsible principles, such as diverse hiring practices and local jobs, they have a tremendous opportunity to shape our communities,” says Raicht. “They can act as a catalyst for others in the area to become more inclusive as well.”

Solving societal ills, while turning a profit

A growing class of socially-conscious financiers is looking to disrupt the current capital model with an eye toward long-term, sustainable growth. Unlike traditional venture capitalists, impact investors look for solutions to environmental, health and social justice problems—all areas where a diverse array of tech innovators could make a meaningful contribution, should they win the funding.

The funding category is growing quickly, with impact firms raising around $10 billion in investments since 2010alone. But far more capital is needed to fund the growing numbers of entrepreneurs striving to build businesses that solve real, meaningful problems.

“A large portion of impact investment funding is restricted to verticals like clean technology, microfinance or global health, limiting innovation in other sectors — like journalism and education — that could desperately use it,” says Zepeda.

She points to potential sources of capital that could be allocated to “enlightened businesses” seeking to make an impact. For example, local and state governments can look at whether their pension funds are representing the public interest. “One of the most important ways forward will be to develop alternative financing mechanisms that bridge the gap between traditional bank loans and venture capital. We need more financing solutions for companies that fall in the middle,” says Zepeda.

Such gaps will take time to fill. But, ultimately, boosting tech start-up diversity could bring new opportunities that benefit investors, drive innovation and create thriving and sustainable communities built on socially responsible values.